In the stock market, no one’s worried about anything. Apparently, it doesn’t matter that crude oil made a multi-year high. Jet Airways made a 10% upmove. So nothing fundamental matters.
But still, we’ll keep a watch at Capitalmind. Here’s three reasons why India might have seen the end of the Rate Cut cycle, or at least why bonds are likely to keep falling in price. (When yields rise, prices of bonds fall).
There’s only one reason why RBI will not cut rates. When there’s inflation. And if there’s inflation, bond yields rise today in anticipation of a rate hike or such. Inflation’s been at a low – less than 4% for the most part. So why should we worry?
1. Because of lower grains, pulses and cereal production.
As the awesome monsoon comes to an end, we would have thought that there will be an oversupply of everything. But apparently, things haven’t gone quite that well.
Of course, if there truly is a recession or slowdown in India, things will change – and yields may actually fall, if the RBI takes action. That’s the risk to this assessment.
Markets don’t care, so don’t go about shorting or selling. This market is running on fumes, and it doesn’t care about reality. In general, the view from a macro perspective is to help build context and elements to watch for. It’s like watching paint dry. It’s very very slow.
One caveat: Last year, we had positioned ourselves into short term bonds, starting December 2016. (See post) The bond fund we exited – Birla Sun Life Dynamic Bond Fund – has only returned 2.5% since then, so the exit was timely.